Haywood Securities Analyst Dr. Geordie Mark sees long-term economic strength in the BRIC countries and Asia driving demand for building-block resources like uranium, coal and iron ore. In this exclusive interview with SmallCapPower.com, Mr. Mark names names and discusses his thesis for each sector, starting with uranium.
SmallCapPower.com: Geordie, the spot price for uranium is down about 20% this year. Do you expect it to recoup that loss in 2012? What’s your forecast?
Geordie Mark: Ultimately, we’re looking for a rebound from where the prices are today. And that’s basically based on increases in demand, although it will be a little bit atrophied from expectations in March of this year. And on the basis of that our forecast for next year is a uranium price of about US$70/lb. uranium oxide. That’s certainly a move up and is in support of our expectations for more active purchasing in the market over the coming quarter or two. We’re still seeing life in the sector.
The main question in this sector relates to the suite of reactors that are currently off-line in Japan, and the timing of when they may become re-integrated into the grid. That’s a substantial unknownthat is overhanging the sector. The faster these reactors come back, the healthier demand future for this sector.
SmallCapPower.com: That could be a long wait. China’s building a number of new reactors and a few of them have come on line in 2011. Is demand from China enough to bring those prices back to that US$70/lb. level next year or are we going to need some other catalysts?
Geordie Mark: We ultimately need to have a balance of support for future growth. China’s obviously a big component of that, but we’re also looking for additional growth and demand from Brazil, Russia, India and China (BRIC) countries as well as other Asian countries. We’re still looking at growth from South Korea; we’re looking for mid-term growth out of petroleum-producing nations such as Saudi Arabia and United Arab Emirates.I think we need multiple users driving demand to support more balanced growth.
SmallCapPower.com: There’s an ongoing bidding war happening for Hathor Exploration Ltd. (TSX:HAT), a promising junior with the uranium-rich Roughrider project in Saskatchewan’s Athabasca Basin. The bidders are two titans in the uranium space: Rio Tinto Plc (NYSE:RIO) and Cameco Corp. (TSX:CCO). Who do you expect to prevail there?
Geordie Mark: That’s a really good question, and I don’t think we can define an answer as yet. As you said, they’re two titans of the uranium space, and such a transaction would mark Rio’s initial entrance into Athabasca. Rio has definitely deeper pockets and the capacity to go further if it sees value. But then again, Cameco has the operational synergy, so it can offer more and ultimately still achieve comparable returns. Independent of which company wins the bidding process, I think the primarytakeaway is that both companies share a positive of the sector’s future.
SmallCapPower.com: Is it a case of Rio just bidding up Hathor so that Cameco doesn’t get it too cheaply?
Geordie Mark: I can’t see that being an operational ploy for one of the largest mining houses in the world. The $654 million price tag is substantial but it’s fairly small compared to Rio’s capital obligations in other sectors. For me, the intriguing component here is that with so many other sectors in Rio’s commodity portfolio doing so well, that the company believes in the long-term future of uranium and are looking to Canada and the Athabasca Basin for future growth in the sector.
SmallCapPower.com: If Cameco wins, do you see Rio attempting to gain a foothold in the Athabasca through the takeover of a different company?
Geordie Mark: Another good question. I think Hathor’s Roughrider assets represent a key entry point. But who else in the area has a bunch of assets? Areva Resources Canada Inc. has a collection of assets. Denison Mines Corp. (TSX:DML) also has a collection of assets with Wheeler Riverin Athabasca,but also across North America. Rio is looking for size and longevity of assets so there are numerous candidates that could fit that bill.
SmallCapPower.com: Do you expect to see more consolidation in the space in the coming year?
Geordie Mark: I think the main focus for the industry is what’s happening at the moment with the potential takeover discussions between China Guangdong Nuclear Power Corp. and Kalahari Minerals Plc (LSE:KAH), mainly for Kalahari’s 43% interest in Extract Resources Ltd. (TSX:EXT), which operates the Husab Uranium Project in Namibia.Husab has a collective resource base of more than 500 million lbs., and is basically in Rio’s basically backyard. There was a fairly hefty price tag on Kalahari before the previous negotiations ended earlier this year. I think thefocus will remain on theprogress of those talks, and of whether a formal bid is to eventuate.
SmallCapPower.com: And another Chinese firm, Sichuan Hanlong Group, was looking at purchasing Bannerman Resources, which also has a uranium project in Namibia. Where’s that deal at?
Geordie Mark: At the moment Bannerman’s board is looking at other options as Hanlong and their associated banking partner have taken a longer-term view of asset ownership inNamibia. Bannerman, for the time being, is either going to have to go it alone or look for other partners.
SmallCapPower.com: What are some other prime takeover targets in the uranium space?
Geordie Mark: Ultimately, I think there’s potential for consolidation ofuranium companies with assets in the U.S., particularly those with ISR (in-situ recovery) amenable resource projects. Within that spectrum there’s Uranium Energy Corp. (NYSE.A:UEC); there’s UranerzEnergy Corp. (TSX:URZ); and there’s Ur-Energy Inc. (TSX:URE), to name a few.
All of the aforementioned companies have projects that are either in production, in construction or are well along the permitting path.Uranerz has a project that is under construction; URE has all but one of its licenses and permits from the Wyoming Department of Environmental Quality for the Lost Creek in situ uranium project; and UEC is already a uranium producer.
Outside of the U.S., and not including Hathor or Denison’s assets mentioned earlier, there is Strateco Resources Inc. (TSX:RSC), which has the Matoush uranium project in Quebec. That’s a higher-grade deposit with just over 20 million lbs of uranium oxide. So there are some assets around in North America that could be of interest to other players.
SmallCapPower.com: Do you believe equities are the best way to play the space?
Geordie Mark: Equities have certainly taken a significant haircut in the last couple of quarters. You can’t trade the commodity directly, of course, but there’s a way of trading the commodity through Uranium Participation Corp. (TSX:U). That trades at a fairly substantial discount to the spot price for uranium. It’s currently tradingat an implied price of somewhere around US$40/lb., well below where current spot of almost US$53/lb. That’s a lower risk entry point into the space. If you want to track the commodity, Uranium Participation Corp.’s probably not a bad way to go.
SmallCapPower.com: You also cover coal companies and coal is often portrayed as something dirty or as yesterday’s source of power generation. Yet you see promise in coal. What’s the investment thesis there?
Geordie Mark: If we look at the International Energy Agency’s (IEA) projections for energy production, we still see significant growth for thermal coal. Over the next 20-25 years the IEA is looking at the usage of thermal coal for energy production growing at a greater pace than say oil or nuclear, for instance. Coal is still the largest component of underlying energy demand, certainly from China. It’s still a large component of the underlying demand in U.S., as well as other growing countries like India.
We’re seeing the thermal coal market picking up and moving significant amounts of coal across the Pacific, and into Asia, into thoseeconomies. With incrementally decreasing energy content of the global coal resource base combined with underlying increasing energy demand, we expect that good quality coal assets will continue to garner a premium in order to lock up future security of energy supply.
We’ve already seen a number of companies purchased this year and we expect that trend to continue over the next year or so. The main acquisition this year was Rio Tinto’s $5-billion acquisition of Riversdale Mining Ltd. for its metallurgical coal resources in Mozambique.So, I certainly expect consolidation to continue for this pivotal commodity going forward.
SmallCapPower.com: Recently a Chinese and Japanese consortium made a $1-billion cash bid for Grande Cache Coal. What do you make of that deal?
Geordie Mark: That offer was certainly related to production of metallurgical coal for steel making. The seaborne metallurgical coal market is very tight in terms of availability of good quality coal assets. It’s a positive move in terms of those groups’ outlooks for underlying steel demand.
SmallCapPower.com: And that brings us to another sector you cover: iron ore.We’ve seen some weakness in steel prices through the middle of 2011. Are you expecting steel prices to rebound or are we going to continue to see steel prices fall?
Geordie Mark: Obviously, steel prices have come off over the last couple of months, and with that metallurgical coal prices and iron ore prices have come down, too. That’s in part due to some lower crude steel output data from China, particularly for October. But we’re still significantly above where China’s output was a year ago, and the reason I bring up China is because it produces roughly 46% of the world’s crude steel. They’re a big player and, thus, prices for steel products, iron ore and metallurgical coal are dominated by the progress in crude steel demand in that country. We certainly see a growth picture going forward, especially when we look at World Steel Association data. They expect growth not only in China but also from eastern Europe, and India as that country moves toward greater rates of urbanization and industrialization. So, we still see underlying support for those commodities and for steel products.
SmallCapPower.com: What are you looking for among the iron ore juniors you cover? Companies that have an established resource is certainly one factor. Is there a minimum threshold you’d like to see as far as a resource is concerned?
Geordie Mark: We don’t apply a strict minimum threshold. For us it is all about looking at a combination of parameters, e.g., the quality of the potential product, the proximity and access to infrastructure, timing of initial production and scale potential of output.
Obviously there’s the resource size potential. How big could the resourcegrow to? Could it grow to 100 million tonnes, or does it have the potential to go 10 billion tonnes or more? Resource size potential dictates the potential scale and operating life of any mining and processing facility. If it’s an exploration company without a resource, we look at the geological potential to deliver a resource.
We also evaluate local infrastructure, and particularly focus on potential access to, and available capacity of, road, rail and port facilities.
Other than logistics, another important facet is to look at is the processing requirement of the iron ore product expected to beoutput. Is it a direct shipping ore that you simply dig out of the ground and put on a boat? Or do you require additional capital to build a processing plant?
SmallCapPower.com: We haven’t seen a lot of consolidation in the iron ore space since Consolidated Thompson was bought earlier this year by Cliffs Natural Resources Inc. (NYSE:CLF). As we have discussed, we’re seeing companies like Hathor Exploraion being bought basically at the bottom of the price cycle. As prices for iron ore continue to fall, do you expect to see more takeovers?
Geordie Mark: We believe that there is still a drive for continued vertical integration by steel producers to remedy potential future access issues to the commodity given the oligopoly enjoyed by the ‘Big 3’ in the seaborne iron ore market. Furthermore, we can still see the potential for consolidation within the existing portfolio of iron ore companies as equity markets are now pricing junior companies with good projects at relatively low valuations.
SmallCapPower.com: What’s Haywood’s top pick in the iron ore space?
Geordie Mark: Our two top picks in this sector are Champions Minerals Inc. (TSX:CHM) and Northland Resources Inc. (TSX:NAU). Champion’s flagship Fire Lake North project in the Labrador Trough has a resource base that has grown significantly over the last year, and the company is due to report the results of a feasibility study in Q3’12. Northland Resources is in the construction phase and is anticipated to bea near-stage iron producer via the Kaunisvaara Iron Concentrate Project in Sweden.
SmallCapPower.com: Thank you for talking with us today, Geordie.
Interview Disclosure: This interview was conducted by Brian Sylvester on behalf of SmallCapPower.com. Mr. Sylvester and/or his family may own shares of the companies mentioned in this interview.
Geordie Mark may/may not own shares in all of the companies mentioned in this interview.
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